Water Wars

By Bob Bobala

Bottled water is a multibillion-dollar growth industry -- on its way to becoming the most consumed beverage in America outside of soft drinks. Should you buy it, bottle it, or invest in it? Here's a look at the major players, the outlook for investors and consumers, and even the results of one writer's taste test.

 Water, water everywhere -- all of it to drink. The fiercest battle in the beverage industry right now is over bottled water. And for good reason. Bottled water consumption has tripled since 1991, its revenues growing from $2.5 billion to $7.6 billion in 2002, according to Gary Hemphill, senior vice president at Beverage Marketing Corporation.

With 46% of Americans paying up for the clear, cool stuff these days, bottled water is poised to slide past beer, milk, and coffee to become the second best-selling beverage behind soft drinks in the U.S. within the nextcouple of years. Here's how it currently stacks up against its competitors, in terms of consumption per person in 2002:

Beverage Gallons Per Person

  • Carbonated soft drinks
  • Beer
  • Milk
  • Coffee
  • Bottled water

As a whole, the water biz is growing at about 10% per year, but the smaller, single-serve bottles are growing at a clip of 27% annually, giving carbonated beverages a run for their money at every 7-Eleven and supermarket from Boise to Baton Rouge.

Why the amazing growth? Consumers are "more aware of fitness, nutrition, and the importance of hydration in the diet," says Stephen Kay, vice president of communications for International Bottled Water Association (IBWA), which helps set standards for the industry. More and more Americans are willing to pay up for high quality, safe, and good-tasting water -- something western Europeans have done for many years.

The future looks even brighter, according to Kay. Whereas the older generations have been reluctant to pay for water (beyond its cost at your tap), newer generation Americans have come to see it as the norm, and that bodes well for the industry.

The players

One might salivate over the prospect of investing in this kind of growth. But doing so in any significant way in your portfolio is difficult. Mega-multinationals have taken over the industry so their bottom lines are only affected minimally by water sales.

The largest player by far is better known in the U.S. for chocolate than water. Nestle S.A.'s (OTCBB: NSRGY) water division sells 70 bottled water brands in 160 countries. Its North American subsidiary sells nine domestic brands, including Arrowhead, Poland Spring, and Deer Park, and five imported brands, including San Pellegrino and Perrier. Nestle Waters North America, Inc. had revenues of $2.1 billion in 2001 (2002's numbers aren't available yet). Its market share is 32.5% and growing.

PepsiCo (NYSE: PEP) comes in second place with its Aquafina product, which currently only has a 10% market share but is the top-selling single-serve bottled water in the U.S. In 2001, Aquafina sales grew nearly 45% and comprised 4% of all of Pepsi's beverage sales.

Coca-Cola (NYSE: KO) falls into third place, its Dasani product grabbing an 8.5% market share in 2001. Sales grew a hefty 40% in 2002, however. Coca-Cola also recently entered into a production, marketing, and distribution partnership with France's Groupe Danone, owner of a number of niche water brands, including Evian. Over the last three years, Coke's global bottled water business has grown at a compound annual rate of 59%.

Last month, Fortune magazine reported that Goldman Sachs estimates bottled water will only account for 20% of Coca-Cola's North American profit growth through 2005 and only 10% of PepsiCo's. So, what's an investor to do? One could take a look at Pepsi Bottling Group (NYSE: PBG), the leading U.S. distributor of Pepsi's beverages. Its profits are far more tied to the water business than Pepsi itself, whose Frito-Lay snack food division chomps its way to the bottom line far faster than water sales. Pepsi Bottling Group has posted 12 consecutive quarters of double-digit earnings growth, unlike its rival Coca-Cola Enterprises, which has not fared as well recently.

Can't I go into business with a garden hose?

Of course, you might spurn the corporations altogether and decide to go into business for yourself. All you need is a kitchen sink and some plastic bottles, right? The margins must be fantastic, no? Think again.

Bottled water is regulated by the U.S. Food and Drug Administration as a packaged food product. There are stringent standards for purification and labeling. For example, if it's spring water, it has to say where it's bottled -- and that's part of the marketing and mystique, too. Which really puts a damper on my plans for Bobala's Bottles, a fine water processed from the garden hose in my backyard.

When it comes to mystique, there probably was no finer brand than Perrier sparkling water, which comes from a spring Hannibal drank from before attacking Rome during the Punic Wars. Dr. Louis Perrier began operating the spring in the late 19th century, and by 1976 the sparkling bubbly, which was later named after him, accounted for 80% of all imported water in the U.S.

That's where the fad began -- with a doctor promoting a spring's medicinal and cathartic purposes. And while those special springs are still used -- and their waters sold for a premium -- good old-fashioned tap water, purified and bottled with shiny packaging for the on-the-go consumer, is what's driving the largest amount of growth in the U.S. today. Aquafina and Dasani are simply taken from municipal water supplies.